Fund business looks to capitalize on IPO revival

JohnSpence

BOSTON (MarketWatch) -- The lending crunch and the resulting collapse in stock prices have put initial public offerings into deep freeze, but some mutual-fund giants are positioning to profit if there's a thaw in the IPO market.

Kohlberg Kravis Roberts & Co. Monday said it will give some customers of Fidelity Investments access to IPOs and other stock offerings from companies backed by the private-equity firm.

The two firms said the partnership will allow Fidelity clients to buy retail securities that hold public offerings in which KKR participates as an underwriter.

"While it's no secret that the IPO market has slowed over the last couple of years, we are beginning to see signs that it may be picking up momentum," said Mark Haggerty, president of Fidelity's capital markets division.

When struggling banking giants recently opened the window for some eye-popping, TARP-fueled stock offerings, plenty of others outside the troubled financial sector blew in as well.

While experts hailed the stock feast as healthy after a equity dry spell reaching back to the early days of the current recession, no one knows how much longer the pace of such offerings will continue outside the financial sector, which is mostly done for now.

Incredibly, much of the new stock deals haven't had a dampening effect on the broader market, which has been producing robust gains over the past several weeks. See full story.

"We believe that with a portfolio of nearly 50 companies that generate more than $200 billion in annual revenues, KKR will provide a significant source of investment opportunities for our customers over the coming years," Haggerty added. See news coverage.

The Wall Street Journal, which first reported the initiative, noted that KKR hasn't sold shares in an IPO of any of its portfolio companies during the financial carnage of the past couple years, while the firm's own IPO has been put on hold.

The partnership is the next logical step in KKR's capital-markets ambitions, said Isabel Schauerte, an analyst at Celent, a financial research and consulting firm.

"The firm is working towards cutting its reliance on third-party underwriters," the analyst wrote in a research note. "Moreover, it hopes to benefit from a comeback in the market for initial public offerings once normalcy re-establishes itself and firms going public can receive fair value again."

IPO market battered

Indeed, the IPO market has ground to a halt during the worldwide recession. In late May, Russell Investments said in the three quarters since June 2008, only seven IPOs were added to the Russell 3000 Index, a broad measure of U.S. stocks.

"Last year we saw the lowest number of U.S.-based IPOs added to the global index since 2003, but this year it's even lower for both the U.S. and global markets," said Mark Thurston, head of global equity research at Russell Investments.

"It is clear from the dramatic decline in the last year that the global recession has created an inhospitable environment in which to introduce an IPO," Thurston added. "While a few IPOs have performed very well since coming to market earlier this year, the number of IPOs is expected to be lower for the remainder of 2009 than it has been in recent years."

Despite a bleak economic outlook, some hope the recent stock rally leads to a recovery in the IPO market as sentiment improves. Last month's cheery response to the debut of online reservation service Open Table Inc.
OPEN
was seen as an encouraging sign. However, some warn the optimism could be premature and that regulatory filings show the deal pipeline is still thin. See related story at WSJ.com.

The deal between KKR and Fidelity comes at a time when mutual-fund investors have limited means for tapping the IPO market. One of the few options is IPO Plus Aftermarket Fund
IPOSX, +1.31%
which is managed by Renaissance Capital. The fund has a $5,000 minimum investment for regular accounts and a $2,500 minimum for IRA accounts. IPO Plus Aftermarket Fund has assets of about $9 million and is down 28% for the yearlong period that ended last Thursday, according to Morningstar Inc.

Additionally, there is an exchange-traded fund designed to track the IPO market: First Trust U.S. IPOX 100 Index Fund
FPX, +0.41%
The ETF has an expense ratio of 0.6%.

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